Source: http://www.investors.com/NewsAndAnalysis/Article/538630/201006251913/Financial-Deform.aspx
Regulation: The financial reform bill that's about to be passed is reform in name only. It does little to correct the problems that led to our meltdown, and may do more harm by giving people a false sense of security.
The media have called this "compromise" legislation the most sweeping change in U.S. financial regulation since the 1930s. Which is saying a lot.
The two sponsors, Rep. Barney Frank and Sen. Chris Dodd, are as much responsible for the financial crisis as any two people in America. Yet, we're now supposed to believe that they, and their flailing party, which can't even meet its legal obligation to produce a budget, have now fixed our financial system.
President Obama crowed about it in the press, and planned to use the bill as leverage in negotiations with his European counterparts at the G-20 meeting. Obama hopes to sign the bill by July 4.
Before you get too excited, you should know the "compromise" in Dodd-Frank isn't between Republicans and Democrats, but between Democrats and Democrats. In short, it's the left's idea of how to regulate Wall Street. And while some things in the bill aren't bad, most of it is.
We won't go into everything the bill would do, since the 2,000-page tome can't be distilled into a few easy-to-digest bullet points. But what we can tell you is what it doesn't do, which is plenty. In fact, the bill fails to address any of the key issues raised by the 2007-08 market meltdown, while imposing onerous new restrictions on both banks and consumers.
For instance: Fannie Mae and Freddie Mac, which were inarguably at the heart of the financial crisis, and which have already cost U.S. taxpayers $146 billion (with hundreds of billions more on the way), aren't addressed in this bill at all.
This is insane, given the role these two government-sponsored enterprises played both in encouraging lending to poor, unqualified homebuyers and repackaging those securitized loans for resale to banks and investors around the world.
Worse, the bill does nothing to amend the "too-big-to-fail" doctrine that has guided U.S. banking policy for decades. Any bank that runs into trouble can still walk up to Uncle Sam's borrowing window and, hand outstretched, ask for money. And if the bank is politically connected or very large, it will get it.
This puts every small bank, investor or lender at a huge disadvantage, since they're most certainly not "too big to fail." This is a big reason why the biggest U.S. banks didn't squawk too much about the legislation. As bad as it is, it gives them a competitive edge.
The bill also gives federal regulators sweeping new powers to seize and break up financial firms. Good idea, you say? Remember: The government also gets to decide what is a "financial" firm. Does GM, which makes loans, fall into that category? How about Wal-Mart, which issues its own credit cards?
In effect, this lets the government seize and dismantle the assets of almost any company — and then force others to pay for it.
The bill also creates a new agency inside the Federal Reserve that will have extensive power over consumer lenders. Hold the applause, because likely new limits on checking account fees and interest on credit cards will mean less access to credit, not more.
Another part of the bill, and one that's gotten little attention, makes changes to the amount of capital banks must keep to back up their loans. Banks eventually will be forced to raise more capital, or to reduce their lending. It also gives the government oversight over the $600 trillion derivatives market, without telling us what the rules will be. That, no doubt, will be left to bureaucrats.
We've just scratched the surface here. We'll have more to say in coming weeks as we plow through this monster of a bill that appears to reform little but harm a lot.
